Furthermore the company wants track progress of all the products that they have in the market using life cycle costing. Every product goes through a life cycle. A product life cycle can be divided into five phases. ; Development ; Introduction ; Growth ; Maturity ;Decline (a) Development. The product has a research and development stage where costs are incurred but no revenue is generated. (b) Introduction. The product is introduced to the market. Potential customers will be unaware of the product or service, and the organization may have to spend further n advertising to bring the product or service to the attention of the market. (c) Growth. The product gains a bigger market as demand builds up.
Sales revenues increase and the product begins to make a profit. (d) Maturity. Eventually, the growth in demand for the product will slow down and it will enter a period of relative maturity. It will continue to be profitable. The product may be modified or improved, as a means of sustaining its demand. (e) Decline. At some stage, the market will have bought enough of the product and it will therefore reach ‘saturation point’. Demand will start to fall. Eventually it will become
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So far the company has launched many products into the market but however their products are priced high unlike the competitors and they are having difficulties to maintain a good profit figure. As adapting life cycle costing they would understand when the company’s production would go on a profit or a loss. And it would be easy to understand through step by step. Traditional cost accumulation systems are based on the financial accounting year and tend to dissect a product’s life cycle into a series of 12-month periods. This means that traditional management accounting systems do not accumulate costs over a product’s entire life cycle and do not therefore assess a product’s profitability over its entire life. Instead they do it on a periodic basis.
Life cycle costing, on the other hand, tracks and accumulates actual costs and revenues attributable to each product over the entire product life cycle. So this makes easier to Advantages & Disadvantages of Life Cycle Costing (a) The life cycle concept results in earlier actions to generate revenue or to lower costs than otherwise might be considered. (b) Better decisions should follow from a more accurate and realistic assessment of revenues and costs, at least within a particular life cycle stage. (c) Life cycle thinking can promote long-term rewarding in contrast to short-term profitability rewarding. (d) The life cycle concept helps managers to understand acquisition costs vs… Operating and support costs.